Netflix rebounded from a $4.6 million first-quarter loss to post net income of $6.2 million on solid revenues of $889.2 million in its quarter ending June 30, the company reported Tuesday.

The service now has about 24 million domestic streaming subscribers, up from 23.4 million in March. But in the U.S., roughly 50 percent fewer new streaming subscribers signed up with Netflix than in the second quarter of 2010, the company said, dismissing the numbers from the year-ago quarter as a "an anomaly due to our mid-year price changes." However, Netflix expects the new subscriber rate in the third quarter of 2012 to return to levels similar to those of the same quarter two years ago.

DVD subscriptions, which the company appears to believe will eventually be phased out, fell to 9.2 million in the second quarter from 10 million.

The streaming video and DVD rental service said that in the second half and early 2013 it would continue to expand in international markets, bring its second batch of originally produced television content to viewers, and create its own content delivery network (CDN).

"Given our size and growth, it now makes economic sense for Netflix to have its own CDN. As a result, we recently announced that we are enabling ISPs to get Netflix video data from Open Connect, a single-purpose Netflix CDN," a letter to shareholders signed by CEO Reed Hastings and chief financial officer David Wells stated.

The company's return to profitability fulfilled the turnaround promised by management following the firm's first loss in eight quarters. But Netflix's second-quarter earnings remained far off the mark the company enjoyed in years past, prior to costly launches of new services in non-U.S. markets and a transition to a streaming distribution model that angered enough DVD-by-mail customers to cause a semi-exodus from the service.

Netflix said in May that many of the users who jumped ship last year over price hikes and the sudden split of its streaming and DVD rental businessesa plan the company ditched last Octoberhad returned. But if last year's Qwikster debacle isn't still hurting the bottom line, the expensive tasks of opening up new international markets and revving up new technology platforms apparently still is.

Full Speed Ahead
Hastings and Wells made the case that such investments would pay off. Within the past two years, Netflix expanded service to Canada, Latin America, and most recently, the U.K. and Ireland. The company said it added 600,000 new international subscribers in its second quarter, bringing its total international membership to 3.6 million users.

"Our technology and development spending reflects our continued investments in improving the Netflix experience. In Q2, these investments produced improved Netflix players for both PC and Mac, as well as the continued expansion of our 'Just for Kids' feature, already on PC, Mac, Wii, PS3, and Apple TV, and coming soon to the Xbox and iPad," the letter said.

With no similar technological or market expansion plans in the offing for the third quarter, Netflix said it expects to again turn a profit. But the company warned that the planned opening of a new, unnamed European market in the fourth quarter would "drive us temporarily back into the red."

Weighing Up The Competition
Netflix said its competition comes in the form of "a variety of video services, including linear TV, DVRs, over-the-top (OTT) pure plays, and authenticated streaming offerings of the MVPDs [multichannel video programming distributors] and cable networks (TV Everywhere).

The biggest long-term challenge to its business continues to be services from MVPDs and cable networks like Comcast's X1 and HBO GO, the company said, while offerings like Hulu Plus, Amazon Prime Instant Video, and Verizon's upcoming Redbox Instant service either face "big challenges" or have yet to "gain meaningful traction relative to our viewing hours."

Netflix also talked up its first batch of original programming as a path forward to winning new subscribers in the face of increased competition.

The company said the second season of Lillyhammer, its first originally produced TV series, would be delivered in 2013. The debuts of two more series, House of Cards and a rebooted Arrested Development are also planned for early next year, while Orange is the New Black and Hemlock Grove are also in the early production phase.

About the Author

Damon Poeter got his start in journalism working for the English-language daily newspaper The Nation in Bangkok, Thailand. He covered everything from local news to sports and entertainment before settling on technology in the mid-2000s. Prior to joining PCMag, Damon worked at CRN and the Gilroy Dispatch. He has also written for the San Francisco Ch... See Full Bio

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